Q&A: Lawmakers once again look to pension system to help balance budget

Ryan Keith

Friday

Jun 26, 2009 at 12:01 AMJun 26, 2009 at 4:06 AM

State government finances are a huge mess, and there's no agreement on how to clean it up. Let's look to the pension systems for help. Sound familiar? It's been a recurring theme for much of this decade as lawmakers and the governor deal regularly with budget holes.

State government finances are a huge mess, and there's no agreement on how to clean it up. Let's look to the pension systems for help.

Sound familiar? It's been a recurring theme for much of this decade as lawmakers and the governor deal regularly with budget holes.

The latest incarnation provides a little twist on the idea of reducing pension fund payments to ease other budget pressures. The goal is to free up billions of dollars that could spare painful cuts in human services and other areas.

But the pension borrowing to be considered by lawmakers this week still causes some heartburn. The state is once again saying, "We know we owe you the money and we're good for it – eventually."

Some questions and answers about how the latest pension borrowing proposal would work and what it means for the budget picture:

Q: Why is this pension borrowing needed?

A: Simply put, to help avoid a major budget meltdown.

Gov. Pat Quinn says the budget deficit is over $9 billion, even with federal stimulus money and some other aid lawmakers provided earlier this year. He has threatened major cuts to service providers and state workers if lawmakers don't approve an income tax increase, yet they're not ready at this point to support that. The new budget year starts mid-week, so time is running out for a solution.

This pension plan essentially allows the state to borrow against payments owed to the pension systems to pay for more pressing needs right now.

Q: How would this borrowing work?

A: It's a way to pay for pensions without using cash on hand.

Each year, state law requires the state to put more money toward paying off pension benefits accumulated over the years by state workers. Shortfalls in payments made by previous legislatures, along with investment losses by the systems, have caused a huge debt to pile up, and the state is using a 50-year plan to pay down that debt.

The pension payment for next year is a whopping total of more than $4 billion. The pension proposal says the state will put up the cash out of its main bank account for about half that amount, then borrow the other half. The systems get their full payment, while the state pays off the borrowed amount in annual chunks over the next five years.

Advocates say this solves a couple of key problems. It frees up about $2.2 billion to be spent on service providers and other needs while ensuring the systems still get their money.

"I think it's a good fiscal tool to help us balance our budget," Quinn said last week.

Q: Hasn't this been tried before?

A: Lawmakers seem to annually consider some plan to reduce pension payments. The debt is so huge that the 50-year payment plan forces them to pay more each year, and when money is tight the temptation is strong to cut back and deal with it later.

In 2003, then-Gov. Rod Blagojevich persuaded lawmakers to issue $10 billion in pension bonds that were used to both pay down pension debt and handle some other current bills. Lawmakers skimped on pension payments a couple of years later.

Quinn called for a repeat of that skimping in this year's budget address. He proposed seeing long-term savings from creating slimmer pension benefits for new state hires and using some of those savings now while money is tight. But lawmakers wouldn't go along.

"Our guys aren't interested in manipulating the pension payment. That was a must for us," said House Minority Leader Tom Cross, R-Oswego.

Advocates say this pension plan is different in a couple of key ways.

It's for a much shorter term than the previous pension bond, so the interest rate is lower and the borrowing is repaid within five years rather than over several decades. Plus, it avoids the riskier setup used before that added more debt if the borrowed money struggled in the stock market.

Q: What will happen with the pension proposal?

A: Look for it to clear the legislature and move on to Quinn's desk early this coming week. Lawmakers are trying to fill in budget gaps before the new budget year starts Wednesday. This could be a key piece of that formula.

Some lawmakers will reiterate long-running concerns about taking out more debt to deal with short-term money problems.

"If this is a part of this budget puzzle that we can fill in and that the Democrats and Republicans and House and Senate and the governor can agree too, then that is the reality of it, but I wouldn't say it is a good idea," said Sen. John Sullivan, D-Rushville. "(It is) just putting off to the future the problems we face today."

At least one House Republican vote is needed to approve the idea because bills in overtime session need supermajority support.

Cross says his members seem willing to support the idea if it means sparing deep spending cuts for providers, but they're not eager to do it.

"I don't think in an ideal world it's the thing to do. You always kind of wonder whether it's good to be borrowing to get yourself out of a problem," Cross said.

Ryan Keith can be reached at (217) 788-1518 or ryan.keith@sj-r.com.

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